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Tuesday, February 5, 2013

Peter Schiff: Market-Crushing Treasury Collapse To Hit This Year

Peter Schiff

Peter Schiff, the divisive investor and commentator that predicted
the subprime/real-estate bubble, is forecasting a U.S. dollar and
bond crisis over the next couple of years. Schiff blames intervened
bond markets, where rates are artificially and excessively low,
and expects the coming crisis to blow the 2008-9 financial crisis
out of the water.

There is little
doubt that the Federal Reserve, with Chairman Ben Bernanke at the
helm, is holding markets by the hand. Bernanke, himself a divisive
figure, has done all he can to push interest rates lower, using
quantitative easing and Operation Twist once nominal rates had hit
the zero-range. While many believe ultra-loose monetary policy is
dangerous, Schiff thinks it will lead to a catastrophic correction.

“The more
you delay it, the bigger it will be,” Schiff tells Forbes
in a phone interview Tuesday, “so we need to raise interest
rates during the recession to confront the inefficiencies.”
Schiff, who runs Euro Pacific Capital and is seen by many as permanently
bearish, argues that government-intervened bond markets are leading
to massive distortions in capital allocation that have only been
exacerbated as the Fed reacted to the last couple of recessions.

Recent market
behavior supports his thesis that massive dislocations in bond yields
distort reality. Ten-year Treasury yields had traded in a narrow-range
for about four months, on the presumption that a weak economy would
continue to count on Bernanke’s monetary support (particularly
of the bond market). On March 13, the policy-setting Federal Open
Market Committee (FOMC) acknowledged an improved recovery, but did
not mention more quantitative easing, or bond purchases, were on
the way, sparking a violent sell-off in Treasuries (exacerbated
by JPMorgan’s dividend
announcement the same day, which triggered a rally in financial
stocks) as market players fled a bond rally they considered fixed
by the Fed.

While Bernanke
delivered calm to bond markets on Monday in a speech that promised
“continued accommodative policies,” the violence of the
sell-off speaks to Schiff’s argument. “We consume more
than we produce and we borrow abroad, but we are never going to
be able to pay them back,” says Schiff.

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